Income inequality-economic growth and non-linearity: a case of Pakistan

Purpose – The purpose of this paper is to investigate the relationship between income inequality and economic growth, both in linear and non-linear specifications. Design/methodology/approach – The paper has employed annual time series data over the period of 1971 up to 2005. Autoregressive distributed lag model (ARDL) bounds testing approach has been used for cointegration and error correction model for short run behavior. Unit root problem is handled by the use of augmented Dickey-Fuller unit root test. Findings – The analysis findings are sharply contrasted to the significant association between income inequality and economic growth found in 1994 by Alesina and Roderick and by Persson and Tabellini. The empirical evidence provides support for the existence of Kuznets inverted-U as well as inverted S-shaped curve in Pakistan. Practical implications – This paper opens up new directions for policy-making authorities to equalize income distribution in the case of a small transition economy like Pakistan. Originality/value – This paper convincingly argues that there is a need for case-by-case study on such a project in view of each country's unique characteristics. This paper makes a unique contribution to the literature with reference to Pakistan, being a pioneering attempt that employs ARDL cointegration approach.